MSP M&A Value Peaks In Q3, More Deals May Come In 2024: Report

‘I don’t know when interest rates will start dipping, but I think the consensus in Wall Street is interest rates will start declining sometime next year,’ says John Holland, managing director of Corporate Finance Associates. ‘I think it will just open the gates to an enormous amount of M&A activity in the IT services space.’

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The total aggregate value of MSP M&A deals peaked in Q3 and experts believe interest rates will cool in 2024, paving the way for more deals in the new year.

“It’s inching up from Q1 to Q2 to Q3,” John Holland, managing director of Corporate Finance Associates, told CRN. “I find it encouraging that the aggregate transaction value inched up a little bit from last quarter, and I find it encouraging that the number of transactions have gone up, despite the fact that interest rates are pretty high right now.”

Laguna Hills, Calif.-based Corporate Finance Associates is an investment banking firm with decades of experience in executing mergers and acquisitions in the IT and telecom services industries.

According to a report the firm publishes quarterly on M&A deals in the technology industry, the aggregate value of IT services declined by 73 percent from the same period last year, but it increased 17 percent from Q2 to Q3 in 2023. The aggregate value is based on companies that disclosed financial terms of the deal.

And although the aggregate value of deal transactions throughout 2023 have been lower than 2021 and 2022, the value is almost the same as it was in Q1 of 2020, just before the COVID-19 pandemic. The number of transactions are also in line with early 2020 numbers.

The same goes for number of deals. M&A deals declined 25 percent from Q3 2022 to Q3 2023 but are almost on par with quarterly pre-pandemic levels. There were 125 MSP M&A deals in Q1 of 2020 while there were 128 in Q3 of this year, according to Holland.

“What I do see is that there are certain businesses that defy gravity, gravity meaning the higher interest rates which would normally reduce the value of businesses that are sold,” Holland said. “The category of businesses that are defying that gravity is really managed service providers. There were so many MSP transactions last quarter, there’s so much consolidation in the MSP space.”

The key to the MSP M&A space, he said, is recurring revenue.

There was also a plateau in the number of deals in 2023, which Holland contributed to the spike in interest rates.

“I would have thought that the number of deals would have declined when the interest rates peaked,” he said. “It just tells you that IT services is a really hot space and that acquirers are still very interested and eager to acquire all different types of IT services businesses, even when the interest rates are high.jhon

“I don’t know when interest rates will start dipping, but I think the consensus in Wall Street is interest rates will start declining sometime next year,” he added. “I think it will just open the gates to an enormous amount of M&A activity in the IT services space.”